GE’s Results, Now a Buy?

So, GE(GE) disappointed and shares are getting pummeled, down 11%. Is it a buying opportunity? I guess I am wondering why one would want to own it anyway?

First the numbers:
Profit from continuing operations dropped to $4.36 billion, or 44 cents a share, from $4.93 billion, or 48 cents, a year earlier. Revenue rose 8 percent to $42.2 billion, less than GE’s prediction of about $44 billion. GE was expected to earn 51 cents a share.

CEO Jeffrey Immelt cut also the annual forecast he had once told investors was “in the bag” for 2008 and did so again on March 13. He says capital markets seized up just days later, forcing GE to slash the value of some securities in the last two weeks of the quarter and blocking some asset sales. The new EPS forecast is $2.20 to $2.30 a share, down from the previous forecast of “at least $2.42”.

So,should you pick up shares? Not me. Even with the sell off today GE still trades at 15 times the new earnings but does sport a 3.8% yield.

For all its diverse businesses GE is essentially s financial services company with 40% of earnings coming from that division. Immelt said today finance units may have a profit decline of 5% to 10% this year and that will offset a non-financial units increase 10% to 15%. The other main driver is it infrastructure business which grew EPS 17%.

All that being said, when you have a business as large and diverse as GE, the value to shareholders comes down to the man at the top. Look at Berkshire Hathaway (BRK.A). A huge business that is basically an insurance business that, like GE, has its other businesses in industry. The difference is that with Berkshire, you have Warren Buffett, perhaps the greatest capital allocator ever at the helm. Through that, he can drive results. Immelt is good, but he is no Warren.

There comes a point where conglomerates simply become to large for shareholders to truly benefit from the performance of the diverse businesses. What happens is a mean reversion to mediocrity in the multiple people will pay for shares. This is why for the last 7 years GE has traded between $30 and $40 a share with only a brief drop below in 2002.

GE’s financial services and health care divisions are now a drag on the high flyer like infrastructure. By itself, it would command a PE of at least 20 based on its growth rate and prospects. GE as a whole now trades at 15.

What GE should do is an Altrai (MO) like spin of the infrastructure business to the shareholders. Without that business, the multiple left on what is left on GE would shrink and then you would have a potential value opportunity there with a nice fat dividend yield. Value inclined investors would likely pick up shares, support the price. This would be offset for current shareholders by the PE expansion on the infrastructure business.

This would allow shareholders to fully benefit from the current strong growth in the infrastructure business while at the same time allowing them to participate in the rebound in financial services and health care.

Likely? No. Would work though..

Disclosure (“none” means no position):Long MO,None

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